CIBA INTERNATIONAL LTD. v. TUNG KA HUNG AND OTHERS

HCCW 1193/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1193 OF 2002

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R U L I N G

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1. This is a contributory's petition for winding-up and the matters relied upon by the Petitioner as set out in the Petition revolved around disputes between shareholders. Apart from winding-up of the Company, there is an alternative prayer asking for an order that the 1st and the 2nd Respondents do purchase the shares of the Petitioner in the company. This kind of winding-up petition is different from a creditor's petition. Usually, the existence of shareholder's dispute should not prevent a company from continuing to carry on with its business. Hence, soon after the presentation of petition, the Respondents took out a summons asking for validation order to enable the company to continue with its business pursuant to Section 182 of the Company Ordinance.

2. The application first came before Woolley DJ on 28 November 2002. It was adjourned with direction for filing of evidence. Leave was granted to all parties to file further evidence within 14 days. That was coupled with the direction that earliest possible date be given for the hearing of the validation order application. Although Counsel for the Petitioner suggested that there was no explicit order to bar the filing of further evidence, I am of the view that it must be implicit in that direction that further leave is required for evidence to be filed after that time limit. Both parties filed further evidence within that time limit.

3. On 21 January 2003, without leave from the court, the Petitioner filed 3 affirmations/affidavits. Those were substantial evidence, the affirmations together with exhibits were contained in a supplementary bundle placed before me. That bundle was up to 65 pages.

4. This prompted the Respondent to file a 4th affirmation of Tung Ka Hung on 23 January 2003. This morning, when I was just about to enter into the courtroom, the Petitioner handed up through my clerk a 7th affirmation of Chow Chung Man. Counsel for the Respondent informed me that he also only received a copy of that affirmation when he arrived at court.

5. Ms Liu, who appeared on behalf of the Petitioner, was unable to explain about such late filing of evidence. However, she insisted that the court must have regard to all the evidence placed before it, including the 7th affirmation of Chow Chung Man. She rejected the offer by Mr Lo (Counsel for the Respondent) that the matter be proceeded on the basis that only the 7th affirmation is to be excluded. Mr Lo therefore asked for an opportunity to respond to this affirmation, and for that purpose the matter has to be adjourned.

6. I have checked with the Listing Clerk and secured an early date for the resumed hearing on 4 March 2003.

7. In the meantime, Mr Lo asked for interim relief. He submitted that the Company needed to have fund to pay its ordinary expenses in terms of salaries, mortgage repayment, utilities etc. Since the advertisement of the petition, the Company has been unable to make those payments.

8. On the other hand, Ms Liu opposed that application. She argued that it would be against the spirit of Section 182 to grant interim relief. She submitted that there is an allegation of insolvency and to authorize interim payment before coming to a final conclusion as to whether the Company is insolvent is wrong in principle. She said there is a risk of preference to a particular creditor if payment is authorized at this stage. She also submitted that there is a risk of depletion of assets of the Company and the Petitioner had been kept in the dark as to the running of the Company. She reminded the court that there is an allegation of diversion of business.

9. I accept that at this stage I cannot reach a final conclusion on the solvency of the Company. On the other hand, I must say that from my reading of the papers, it is by no means a foregone conclusion that the Company is insolvent. On the one hand, the Respondents have produced a management account of the Company and argued that it is solvent. I also note that the audited account of the Company for 2001 produced by the Petitioner showed that the Company had a net asset of $10,492,775.00 as at 31 March 2001.

10. On the other hand, the Petitioner relied on some observations of a Mr Daniel Wan to assert that on proper accounting basis, the Company should be regarded as insolvent. I, however, note that Mr Wan was involved in litigation with the Company in a High Court action. I have expressed my misgivings as to reliance being placed on his opinions in these proceedings.

11. With regard to the affairs of the Company, allegations and cross-allegations were being raised by the parties against each other. The Respondents are suggesting that the Petitioner is using this Petition for ulterior motive. There is a pending application to strike out the Petition.

12. Ms Liu also referred to the fact that 2 supporting creditors have given notice of intention to appear. However, they have not appeared before me today and I do not know whether they would oppose this application. Ms Liu even suggested that if a validation order is made to enable the Company to pay off the debts of these creditors, it would be wrong. That seems to me to be an unmeritorious position to take. On the one hand the Petitioner is using this Petition to prevent the Company from paying its creditors, on the other hand the Petitioner is relying on the fact that these creditors supported its Petition.

13. On the whole, based on the material before me, within the proper ambit which I could have regard to those material at this stage, I am of the view that in the exercise of my discretion as to interim relief, I should not place too much weight on the allegation of insolvency at this stage.

14. In the circumstances, I do not attach much relevance to the principles applicable in the context of an insolvent company. I think the guiding principles for considering a validation order application in the context of a shareholder dispute situation are those set out in Re Parnip Investment Ltd [1991] 2 HKC 272 and Re a Company [1987] BCLC 200.

15. Although the matter is subject to dispute, the Respondents have filed evidence showing that the Company is still a going concern and it is still conducting business. Ms Liu submitted that the Company should not be allowed to carry on business pending the resolution of the disputes between the parties. That cannot be right.

16. Bearing in mind the history of the proceedings and the fact that it was due to the Petitioner's unexplained late filing of evidence that the application cannot be dealt with today, and taking into account of the circumstances of the case, I am of the view that subject to the argument as to jurisdiction, the court should grant interim relief with conditions attached to safeguard the legitimate interest of the Petitioner. The Company should be allowed to continue with its ordinary business activities during this interim period.

17. Ms Liu suggested that Section 182 does not give this court any power to grant interim relief. She cited no authority for that proposition. I reject that submission. By its very nature, Section 182 is very much an interlocutory measure. It deals with the disposition of the property of a company after the presentation of petition but very often before the hearing of the petition. The court has to exercise that power from time to time before final resolution or findings as to the rights and wrongs between the parties. I see no reason why the power of the court in that section should be curtailed so that such power could not be exercised until a final conclusion is reached as to the solvency of the Company.

18. For these reasons, I would grant interim relief as follows: -

(1) Order in terms of para. 1 of summons of 13 November 2002 with a cap in the sum of $400,000.00. This is intended to be an interim relief up to 4 March 2003.

(2) The Respondents shall furnish a bi-weekly list of all the payments made pursuant to para. 1 above to Petitioner. The first of such list is to be furnished on or before 7 February 2003.

19. The above order is made against the undertaking from the 1st and 2nd Respondents that they would defer payments of their shareholder loans to the interests of unsecured creditors in the event that a winding-up order is made against the Company.

Costs

20. Petitioner to pay half of the costs of today of 1st and 2nd Respondents.

21. As to the other half, costs in the cause of summons for validation order.